Demand forecasting is an estimate of the future demand.

It cannot be
100% precise. But it gives a reliable approximation regarding the
possible outcome with a reasonable accuracy. It is based on
mathematical laws of probability.
Demand forecasting may be undertaken at :
Micro level : Demand forecasting by individual business firm
Industry level : Demand forecasting for product of industry as a
whole
Macro level : It refers to the aggregate demand for the industry
output by the nation as a whole.

Short Term & Long term demand forecasting :

Short term forecasting normally relates to a period not exceeding a

year. It may serve the following purpose :

Evolving a sales policy

Determining price policy
Evolving a purchase policy
Fixation of sales targets
Determining short term financial planning

Long term forecasting refers to forecasts prepared for long period

during which the firm’s scale operations or firm’s production
capacity may be expanded or reduced. It serves the following purpose
:

Business planning
Manpower planning
Long term financial planning

General Approach to demand forecasting :

Specification of Objectives :

Identify and clearly lay down the objectives of forecasting whether it

is short term forecast etc.

Identification of Demand Determinants

Ascertain the determining variables of the demand function for the

product. There are three important categories of goods i.e durable
goods, non-durable goods, capital goods.

Choice of Methods of Forecasting

Interpretation
Methods of demand forecasting :

Forecasting Methods :

Survey Methods
Consumer Survey Method
Collective Opinion Method
Market Experiment Method

The Consumer Survey :

A sample survey of the consumers may be
undertaken questioning them about what they are planning to
buy. A questionnaire may be prepared in this regard. In
questionnaire the respondents may be asked for their reactions.
Drawbacks : Expensive, Time Consuming, Non cooperation

Collective Opinion :
It is also referred to as sales force
polling and experts opinion survey. Under this method the
salesman have to report to he head office their estimates of
expectations of sales in their territories. Such information can
also be obtained from retailers and wholesalers of the company.

Drawback : High element of bias of reporting agency

Delphi Method :
This method is used for conducting opinion poll or survey. Under this
method the group of experts are repeatedly questioned for their
opinions or comments on some issues and their agreements and
disagreements are clearly identified.
To forecast with Delphi the administrator should recruit between five
and twenty suitable experts and poll them for their forecasts and
reasons. The administrator then provides the experts with anonymous
summary statistics on the forecasts, and experts’ reasons for their
forecasts.
Market Experimentation :
Experimentation in Laboratory : A small consumer laboratory is
formed by creating artificial market situation. To study consumer
reaction to change in demand variables, in the controlled conditions
of the consumer clinic, the selected consumers are given small
amounts of money and asked to buy certain items. The consumer
behaviour is then observed and inferences are drawn. Drawback :
Time consuming

a) Test Marketing : Under this method, the main

determinants of the demand of a product like prices,
 advt, product design, packaging,etc are identified.
These factors are then varied separately over different
markets or time periods holding other factors
constant. The effect of the experiment on consumer
behaviour is studied under actual or controlled market
conditions which is used for overall forecasting
purpose. Drawback : Expensive, Risky

Statistical Methods of demand forecasting :

Consumption level method :

Consumption level demand may be estimated on the co-efficients of
income elasticity and price elasticity of demand
D* = D ( 1 + M*.em )
Where D* = Projected per capita
demand
D = Per capita demand
M* = Projected relative change in per
capita income
em = Income elasticity of demand

Illustration : Suppose the income elasticity of demand for

chocolates is 3. In the year 1995, per capita income is $500 and
per capita annual demand for chocolates is 10 million in a city. It
is expected that in the year 2000 per capita income will increase
by 20 %. What will be projected per capita demand for
chocolates in 2000

D* = (10) ( 1 + 0.2 X 3 )
Illustration : Present markets demand for commodity X is 2000
Kg. at Rs. 10 per Kg. Its price elasticity is 2. Suppose, if price
declines to Rs. 5, then expected change in demand is :

Trend Projections :

A time series analysis of sales data over a period of time is

considered to serve as a good guide for sales or demand
forecasting. There are two methods used in trend projections :
a) Moving average method
b) Least square method

Moving average method

• An averaging period (AP) is given or selected
• The forecast for the next period is the arithmetic
average of the AP most recent actual demands
• It is called “moving” because as new demand data
becomes available, the oldest data is not used

Example: Central Call Center

Moving Average
CCC wishes to forecast the number of incoming
calls it receives in a day from the customers of one of its clients,
BMI. CCC schedules the appropriate number of telephone operators
based on projected call volumes.
CCC believes that the most recent 12 days of call
volumes are representative of the near future call volumes.
– Representative Historical Data

Day CallsDay Calls

1 159 7 203
2 217 8 195
3 186 9 188
 4 161 10 168
5 173 11 198
6 157 12 159
Use the moving average method with an AP = 3 days to develop a
forecast of the call volume in Day 13.

F13 = (168 + 198 + 159)/3 = 175.0 calls

The method of least squares is more scientific as compared to the

method of moving averages. It uses straight line equation Y = a +
bX to fit the trend to data
Regression Analysis
Linear regression analysis establishes a relationship between a
dependent variable and one or more independent variables.
Regression Equation

This model is of the form:

Y = a + bX

Y = dependent variable
X = independent variable
a = y-axis intercept
b = slope of regression line

Constants a and b
The constants a and b are computed using the
following equations:

a=
∑x∑∑∑ 2
y- x xy
n∑x -(∑x) 2 2

n∑ ∑∑
xy- x y
b=
n∑ ∑
x-( x ) 2 2
Once the a and b values are computed, a future value of X can be
entered into the regression equation and a corresponding value of Y
(the forecast) can be calculated.

Example: College Enrollment

At a small regional college enrollments have grown steadily over the

past six years, as evidenced below. Use time series regression to
forecast the student enrollments for the next three years.
Students
Year Enrolled (1000s)
1 2.5
2 2.8
3 2.9
4 3.2
5 3.3
6 3.4

 Simple Linear Regression

x y x2 xy
1 2.5 1 2.5
2 2.8 4 5.6
3 2.9 9 8.7
4 3.2 16 12.8
5 3.3 25 16.5
6 3.4 36 20.4
Sx=21 Sy=18.1 Sx2=91 Sxy=66.5
Simple Linear Regression

91(18.1) − 21(66.5)
a= = 2.387
6(91) − (21)2

6(66.5) − 21(18.1)
b= = 0.180
105
Y = 2.387 + 0.180X

Simple Linear Regression

Y7 = 2.387 + 0.180(7) = 3.65 or 3,650 students

Y8 = 2.387 + 0.180(8) = 3.83 or 3,830 students
Y9 = 2.387 + 0.180(9) = 4.01 or 4,010 students

Note: Enrollment is expected to increase by 180

students per year.